Natural Gas, the New King of Energy
"It's Essentially Free Energy"
“Everything we do now is based on natural gas. Everything. It’s a major shift that’ll last for decades,” he said.
“There’s so much supply coming to the market that there’s not enough storage capacity. It’s insane. The numbers I’m seeing are staggering. At a price of $3 per M, it’s essentially free energy.”
That’s what the guy sitting next to me on my flight home from Vegas this weekend told me.
Ninety percent of opportunity is timing, location, and showing up...
And it just so happened I was on the right flight, sitting in the right seat.
You see, the guy sitting next to me is an energy trader for a major utility company headquartered here in Baltimore.
The company does about $14 billion in annual revenue, provides energy in several states in the U.S., and has over 1 million retail customers. It’s a big player, for sure.
He continued, “What I do is buy generation, or heat. I don’t care where it comes from — as long as I get the lowest price... and right now, nothing can compete with natural gas.”
Not even nuclear.
Then I asked him the $64,000 question: What about renewable energy?
I will not tell you what he said. But he answered in an almost remorseful way, apologetic for telling me what he truly thought and what he was experiencing in the trading pit.
After his explanation, he said, “I’m sorry for being so pessimistic.”
Last week, NPR ran a story that seemed to be incongruent with its stigma of being a Left-leaning media outlet. Whether or not that’s an accurate assessment of its political leaning, it caught a lot of attention for its stark honesty.
The headline of the piece was “Solar Panels Compete with Cheap Natural Gas,” and it recounted the story of Barbara Scott, a resident of Pennsylvania, where the natural gas boom is front and center:
Barbara Scott had 21 solar panels installed last March on her house in Media, Pa. Scott's family was the first in the community, and she was prepared to evangelize, "We can have open houses and write newsletter articles and promote the idea of solar," she said. But that was before the economics changed.
With government rebates and tax incentives, Scott says, her family spent $21,000 to install the system. She figured it would take eight years to recoup that investment.
A lot of other people had the same idea at the same time, which sent the price of solar energy credits down sharply in Pennsylvania. Scott says that added another seven years to the payback period.
On top of that, Scott says, electricity rates aren't going up as quickly as she thought they would, thanks in part to low natural gas prices.
"So that, again, adds another two years to our payback period," she says. "We're up to 17 years, which is, essentially, the life of the system. And we haven't even considered what happens if the system breaks or what it's going to cost to take the system off the roof and dispose of it. "
Despite this, Scott says she's still happy to have the panels on her house.
"But now, knowing it's — at best — a break-even proposition, we're not so comfortable telling other people to do it," she says.
This NPR article — coupled with my conversation with the utility company energy trader — confirmed what I’ve been thinking for months...
Natural gas is the new king of energy.
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The Headlines Tell the Tale
The past two weeks have seen a flood of activity in the natural gas space in America. Take a look:
- Total invests billions in shale gas
Total is banned from developing “unconventional” hydrocarbons in France, its home market, but is plowing billions of dollars into the US as it seeks to tap booming demand for oil and gas extracted from shale rock. — Financial Times, Jan. 6
- Exxon Gets 13,200 Acres
Exxon Mobil has acquired about 13,200 acres in leases in Monroe County as the oil and natural gas giant continues expanding its Utica Shale footprint. — The Intelligencer, Jan. 8
- China's Sinopec buys stake in five shale projects in the U.S.
Devon Energy Corp announced Tuesday the sale to China’s Sinopec of a one-third stake in five shale projects in the United States. The terms of the deal call for China’s No. 2 oil company to pay 900 million dollars in cash to the US firm and contribute 1.6 billion toward the cost of drilling. — Bloomberg, Jan. 4
- Shale Bubble Inflates on Near-Record Prices
Chinese, French and Japanese energy explorers committed more than $8 billion in the past two weeks to shale-rock formations from Pennsylvania to Texas after 2011 set records for international average crude prices and U.S. gas demand. As competition among buyers intensifies, overseas investors are paying top dollar for fields… — Bloomberg, Jan. 9
The natural gas race in the United States is moving so fast, it makes your head spin.
And it’s starting to spread globally, just like the flu...
In Asia, natural gas costs around $17 per M, a near 600% premium to the cost of natural gas in the States.
So it makes sense that Asian energy explorers would take stakes in shale gas formations in the U.S. Not only will they enjoy the production benefits, but they’ll learn the technology of hydraulic fracturing so that they can exploit their own shale fields.
Think about this for a second: The U.S. holds an estimated 2,543 trillion cubic feet of gas — enough to supply America’s demand for more than a century, according to the U.S. Department of Energy.
Shale gas like that found in the Marcellus accounts for 862 trillion of that total.
In China, it’s estimated the country's shale gas formations contain 1,275 trillion cubic feet of gas. So it’s in China’s best interest to learn everything it can from American hydraulic fracking.
Regardless, the U.S. has a major head start in shale gas production.
And just as they have in the Bakken, early investors will make fortunes riding this gas wave.
Bottom line: America is going to be swimming in an ocean of natural gas and natural gas profits. And that will help the American consumer.
So, how did I end my conversation with the utility energy trader?
I asked him for a prediction.
He thinks natural gas is headed to $2.50 per M. That’s beyond free.
As we go to press, natural gas is trading for $2.82 per M.
The original bull on America,
Brian is a founding member and President of Angel Publishing and investment director for the income and dividend newsletter The Wealth Advisory. He writes about general investment strategies for Wealth Daily and Energy & Capital. Known as the "original bull on America," Brian is also the author of the 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. In addition to writing about the economy, investments and politics, Brian is also a frequent guest on CNBC, Bloomberg, Fox and countless radio shows. For more on Brian, take a look at his editor's page.
P.S. Last night I watched coverage of the New Hampshire primary. With the exception of Ron Paul, it reaffirmed for me just how full of crap politicians are. They’re all busybodies.
And just in case you think Republicans are vastly different than Democrats in their views on the proper role of government, I give you simply a shocking quote from Rick Santorum:
One of the criticisms I make is to what I refer to as more of a Libertarianish right.
They have this idea that people should be left alone, be able to do whatever they want to do, government should keep our taxes down, keep our regulations low, and that we shouldn’t get involved in the bedroom, we shouldn’t get involved in cultural issues. That is not how traditional conservatives view the world.
There is no such society that I am aware of, where we’ve had radical individualism and that it succeeds as a culture.
Now I ask you, how is that different from what Bill Clinton said in a 1993 speech in Philadelphia?:
"If the personal freedoms guaranteed by the Constitution inhibit the government's ability to govern the people, we should look to limit those guarantees. The purpose of government is to rein in the rights of the people."
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